‘Liable to tax’ redefined, a struggle for Indian businessmen living in Gulf

After amending the definition of the term “liable to tax” in the Indian tax laws, those businessmen who were getting rid of paying tax, face a tougher and more challenging life.

The new condition has ended the practice of using Dubai (and also some other countries) with the purpose of avoiding tax in India.

Redefining “liable to tax” was mentioned in an annexure to FM Nirmala Sitharaman's budget presentation yesterday. As per the Finance Bill: "The term liable to tax, in relation to a person, means that there is a liability of tax on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided.”

Desi companies that have NRI-owned group entities in popular tax havens such as the UAE, and are run from India, will be extremely impacted by the amendment. From now on, money earned by these NRIs from those foreign group entities will be taxable in India.

“Their income from foreign businesses controlled from India, or professions set up in India, would now be liable to be taxed in India,” told Gautam Nayak of CNK Associates. This amendment will be valid for the entire FY 2020-21, as well as subsequent years.

Many Indians  are living in Gulf countries, where there is no tax laws for individuals; they earn more than Rs 15 lakh of taxable income in India. These people are likely to be majorly impacted, insomuch now they will come under the "Resident and Not Ordinarily Resident" category in India.

For the record, the income earned directly in India was always taxable in the hands of such citizens. But following the amendment, the incomes they earn outside the country from companies set up in foreign places will also be taxed in India.

But, it will not bring any changed on salaried professionals working in places such as the Gulf. They do not need to pay tax in India on the salary they gain there.

As of now, the term “liable to tax” had not been clearly defined. Consequently, the taxman used a host of other mechanisms to deal with such cases. Some of these were particularly relevant to Indian citizens living in the UAE.